Total revenue in the third quarter was $576.7 million, up 5.4% from $547.0 million a year ago. The year-over-year improvement was buoyed by increase in recurring revenues of approximately $16.0 million and higher distribution revenues of $13.0 million.

Broadridge managed to sustain a 99% client retention rate. Recurring revenue closed sales were $24.0 million in the third quarter, up 50.0% from the year-ago quarter.

Segment Revenues

The Investor Communication Solutions segment generated $404.2 million in revenues, up 8.1% from $374.0 million in the prior-year quarter. The increase was attributable to higher recurring revenues from new business, revenue gains from acquisitions, and higher distribution revenues.

The Securities Processing Solutions segment reported revenues of $169.6 million, up 0.2% from $169.3 million in the prior-year quarter. The increase was driven by strength in new business, partially offset by decline in revenues from the new outsourcing agreement with Apex Clearing Corporation, replacing the terminated outsourcing agreement with Penson Worldwide Inc.

Operating Results

Total expenses in the quarter decreased 1.8% year over year to $509.0 million. Reported pre-tax income was $67.7 million, up from $28.8 million in the year-ago quarter. Pre-tax margin grew 490 basis points year over year to 8.7%.

GAAP net income from continuing operations increased 139.8% year over year to $43.4 million. Earnings per share in the quarter grew 146.3% to 35 cents from 14 cents in the year-ago quarter. The significant increase in earnings from the prior-year figures was due to the impact of the Penson impairment charge and International Business Machines Corp.‘s (IBM) migration costs in the prior year.

The cost of migrating to IBM’s platform follows an information technology services agreement signed between the two companies in Mar 2010. As per the deal, IBM will provide certain aspects of Broadridge’s information technology infrastructure that are currently being provided under a data center outsourcing services agreement with Automatic Data Processing Inc. (ADP).

Excluding the effect of acquisition amortization and other costs, restructuring and impairment charges, adjusted net income was $49.5 million or 39 cents per share compared with $40.6 million or 32 cents in the year-ago quarter.

Balance Sheet

Broadridge exited the quarter with cash and cash equivalents of $182.2 million, down from $259.1 million in the prior quarter. Receivables increased 35.1% from the previous quarter to $412.2 million. Long-term debt remained sequentially unchanged at $524.5 million.

Guidance Reiterated

For fiscal 2013, Broadridge expects revenue growth of 3.0% to 4.0% and recurring revenue growth of 4.0% to 7.0%. The company expects recurring revenue closed sales to be the key driver of revenue growth. Recurring revenue closed sales are forecast in the range of $110.0 million to $150.0 million.

GAAP pretax margin is expected in the range of 13.8% to 14.4% while non-GAAP margin is expected between 15.1% and 15.7%. Earnings per share are expected between $1.60 and $1.70. However, excluding the effect of Penson charges, adjusted EPS is still expected in the range of $1.76–$1.86. Management also expects adjusted free cash flow in the range of $196.0 million to $249.0 million (previously $200.0 million to $250.0 million).

Our Take

Though Broadridge’s third quarter earnings missed the Zacks Consensus Estimate by a wide margin, the top and bottom line were above the prior-year figures. Despite positive momentum, Broadridge reiterated its guidance for the fiscal year, which we believe is due to the unpredictable nature of mutual fund proxy revenues.

The company believes that outsourcing will be a key driver of its growth and we believe that Broadridge is in a position to make such deals. Broadridge entered into a 10-year Master Services Agreement with Apex, under which Apex will outsource its securities processing and back office support services to Broadridge. The company also states that internal growth appears to be moving in a positive direction, which is a bright spot in the quarter.

We remain optimistic on Broadridge’s strategic acquisitions, new product launches, share repurchase program and dividend payout. But significant competition from companies such as HD Supply and DST Systems Inc. (DST) has intensified pricing pressure for the company.